Housing Packs Punch for U.S. Growth in 2013 and Beyond

Workers build a house at in Rancho Santa Fe, California. Photographer: Sam Hodgson/Bloomberg

Feb. 4 (Bloomberg) -- The housing rebound is broadening to
other parts of the U.S. economy and will likely lend impetus to
growth through 2013 and beyond.

Climbing home prices are lifting household wealth and
boosting the purchasing power of consumers. Declining mortgage
delinquencies and foreclosures are buttressing bank balance
sheets, giving them greater leeway to lend. And rising property-tax revenue is fortifying the finances of state and local
governments, alleviating pressure on them to cut budgets.

“The housing recovery will kick into a higher gear as the
year progresses,” said Mark Zandi, chief economist in West
Chester, Pennsylvania, for Moody’s Analytics Inc. “We’re going
to get a lot of juice from the channels” through which it
affects other parts of the economy.

The spreading impact of housing will help the economy
weather looming federal government spending cuts and tax
increases and keep on growing. Rising residential construction
and its knock-on economic effects will boost gross domestic
product by about 0.75 percentage point this year, offsetting
much of the drag from the fiscal squeeze, according to Zandi. He
sees GDP growing at about 2 percent again this year.

Elsewhere, concern the European debt crisis may intensify
caused stocks to fall in the U.S., driving the Standard & Poor’s
500 Index to its biggest decline of the year. The S&P 500
dropped 1.2 percent to 1,495.71 at the close in New York. The
Stoxx Europe 600 Index slid 1.5 percent.

A report from the Commerce Department showed U.S. factory
orders rose less than forecast in December, reflecting a drop in
non-durable goods that partly countered gains in construction
equipment and computers.

Factory Orders

Bookings climbed 1.8 percent after a revised 0.3 percent
drop in November that was initially reported as unchanged, the
agency said today. The Bloomberg survey median called for a 2.3
percent gain. Demand for durable goods increased 4.3 percent,
little changed from a 4.6 percent gain estimated last week,
while non-durables dropped 0.3 percent on declines in petroleum
and tobacco.

Housing has helped lead the economy out of every recession
since 1950 except for the last one in 2007 to 2009, according to
data compiled by Bloomberg. Homebuilding climbed 12 percent in
2012, the first annual increase since 2005. As Americans move
into new homes, they buy appliances and furniture, giving growth
an added lift. Construction-equipment makers to paint- and
building-materials businesses also benefit.

There are “pretty substantial” ancillary effects from
housing, said James Bullard, president of the Federal Reserve
Bank of St. Louis.

Fed’s Bullard

“It’s not just the guys that are putting the roof on the
house,” he said in an interview in Washington on Feb. 1. “It’s
the transportation associated with it, it’s the Realtor
business, the lending business, all kinds of other businesses.

“The psychology has shifted,” he added. “Good things are
happening.”

With housing finally starting to revive, the expansion may
be ready to accelerate, said Michael Bordo, professor of
economics at Rutgers University in New Brunswick, New Jersey.

Research by economists Karl Case, John Quigley and Robert
Shiller found that changes in house prices -- and in real estate
wealth -- have a much bigger impact on consumer spending than
the ups and downs of stock prices and financial wealth.

$80 Billion

Based on that just-published paper, Case reckons that
consumption will be boosted $80 billion this year by the rise in
house prices that has already occurred and expectations among
homeowners of more to come.

Housing “has turned from a headwind to a tailwind” for
the economy, said Case, who developed a series of house prices
indexes with Yale University professor Shiller.

The S&P/Case-Shiller index of property values in 20 U.S.
cities increased 5.5 percent in the year through November, the
biggest gain since August 2006, according to data released on
Jan. 29.

Rising prices and mortgage rates near a record low in the
U.S. are triggering a wave of refinancing, especially bringing
relief particularly to distressed homeowners. Underwater
borrowers --or those who owed more on their mortgages than their
houses were worth -- fell by almost 4 million last year to 7
million, and could drop to 4 million within two years, according
to JPMorgan Chase & Co.

Mortgage Payment

Aaron Miller, 32, an electrical engineer in Orlando,
Florida, cut payments on a $160,000 mortgage to $1,050 a month
from $1,600 after refinancing a three-bedroom property he
retained when he moved in 2011 to a larger home for his family.
Miller, who is renting out the house because he would have been
forced to take a large loss on a sale, expects real-estate
prices will recover in Florida over time. He refinanced under
the government’s Home Affordable Refinancing Program.

“No one would have touched this loan without HARP”
because the value of the loan exceeds the home’s value, he said,
adding the savings from refinancing will go toward day-care
expenses, including clothes and food, for his two children. “We
will just pay the bills. Things had been pretty tight.”

Banks too also are benefiting as loan delinquencies and
foreclosures decline, said Michael Feroli, chief U.S. economist
at JPMorgan Chase & Co. in New York.

Delinquencies -- homeowners who are 90 days or more behind
on mortgage payments -- fell to 5.9 percent of outstanding loans
in the third quarter from 6.3 percent in the previous three
months, according to the Federal Reserve Bank of New York. The
July-September figure was the smallest in almost four years.

Foreclosure Filings

Foreclosure filings dropped 10 percent in December to their
lowest level since April 2007, according to RealtyTrac, the
Irvine, California-based online marketplace for foreclosed
properties.

Reduced credit losses will help banks build up their
capital and pave the way for stepped-up lending, Feroli said.
That will have more of an impact into next year as demand for
credit picks up, adding as much 0.4 percentage point to GDP,
according to the former Fed economist.

“We’re sitting on tremendous liquidity in our industry,”
Bank of America Corp. Chief Executive Officer Brian T. Moynihan
told Bloomberg Television on Jan. 25. The Charlotte, North
Carolina-based bank ranks second by assets among U.S. lenders.

State and local governments also are seeing their finances
improve as their property tax take rises. Revenue from that
source totaled $474.7 billion in the 12 months through September
2012, up 1.6 percent from the comparable period a year earlier,
according to the Census Bureau.

Credit Ratings

Los Angeles received its first credit-rating increase in
more than 20 years from Moody’s Investors Service, which cited
growth in property taxes in the nation’s second most-populous
city. The action, lifting the city’s general-obligation rating
to Aa2, the third-highest level, from Aa3, affects $3.3 billion
in outstanding debt, Moody’s said in a Jan. 23 statement.

Investor confidence in municipal debt is the highest since
2011. It cost the annual equivalent of as little as $172,000
last week to protect $10 million of munis for 10 years through
credit-default swaps, according to Markit Group Ltd. Data
compiled by Bloomberg. That’s the cheapest since July 2011.

“Housing could be a major story this year,” said Carl
Riccadonna, a senior U.S. economist at Deutsche Bank Securities
Inc. in New York, who estimates a $1 increase in home prices
lifts consumer spending by 5 cents to 10 cents. “The housing
recovery is gaining momentum. The sector has worked off its
excesses.”

Homebuilders from Lennar Corp. to D.R. Horton Inc. and
PulteGroup Inc. in January reported that sales and orders
climbed last quarter. Lean inventories of both new and
previously owned homes, alongside rising purchases, bode well
for construction and prices.

Pricing Power

Michelle Meyer, a senior U.S. economist at Bank of America,
in January raised forecasts for home prices through 2015.
Property values will increase 4.7 percent this year, 7.7 percent
in 2014, and 5.2 percent the following period, she estimates.

The various ripple effects from housing -- the industry
that helped trigger the recession and is now the bright spot of
the expansion -- will gather speed this year, Meyer said.

“It’s hard to fight the recovery in housing,” she said.
“It has convinced a lot of non-believers, and is already adding
to growth. 2012 was a good start to the housing rebound, which
should persist and build momentum in 2013.”